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Full text of "Description of proposals relating to middle income tax relief and economic growth : scheduled a hearing before the Senate Committee on Finance on November 26, 1991"

DESCRIPTION OF PROPOSALS 

RELATING TO 
MIDDLE-INCOME TAX RELIEF 
AND ECONOMIC GROWTH 

Scheduled for a Hearing 
Before the 
SENATE COMMITTEE ON FINANCE 
on November 26, 1991 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

November 25, 1991 

JCX-31-91 



CONTENTS 

Page 
INTRODUCTION 1 

I . SUMMARY OF PROPOSALS 2 

II. DESCRIPTION OF PROPOSALS RELATING TO MIDDLE- 
INCOME TAX RELIEF AND ECONOMIC GROWTH 3 

A. S. 1921 (Senator Bentsen) — The Tax Fairness 

and Savings Incentive Act of 1991 3 

B. S. 1846 (Senator Bradley) — The Family Tax 
Relief Act of 1991 9 

C. S. 1009 (Senator Coats) 11 

D. S. 1411 (Senator Dodd) — The Middle-Income 
Tax Relief and Family Preservation Act of 

1991 12 

E. S. 955 (Senator Gore) — The Working Family 

Tax Relief Act of 1991 17 

F. S. 1013 (Senator Grassley) 23 

G. S. 1014 (Senator Grassley) 25 

H. S. 1875 (Senator Lieberman) 26 

I. S. 11 (Senator Moynihan) — The Social 

Security Tax Cut Act of 1991 30 

J. S. 1984 (Senator Specter) — The Consumer 
Confidence and Financial Flexibility Act 
of 1991 32 



(i) 



-1- 



INTRODDCTION 



Thi3 document,^ prepared by the Staff of the Joint 
Conunittee on Taxation, provides a description of proposals 
relating to middle-income tax relief and economic growth, 
scheduled for a public hearing by the Senate Committee on 
Finance on November 26, 1991. 

Part I is a summary of the proposals. Part II provides 
a description of the proposals, including present law and 
effective dates. 



^ This document may be cited as follows: Joint Committee on 
Taxation, Description of Proposals Relating to Middle-Income 
Tax Relief~and Economic Growth (JCX-31-91), November 25, 
1991. 



-2- 



I. SUMMARY OF PROPOSALS 

S. 1921, "The Tax Fairness and Savings Incentive Act of 1991" 
(Senators Bentsen, Adams, Akaka, Baucus, Boren, Breaux, 
Burdick, Daschle, DeConcini, Dodd, Ford, Hatch, Inouye, 
Johnston, Lieberman, Mikulski, Pryor, Roth, and Synms) 

The bill would provide a refundable tax credit equal to 
$300 for each child residing with the taxpayer. The bill 
would also restore the pre-1986 deduction rules for 
contributions to individual retirement arrangements (IRAs) 
and create a new special IRA. Amounts contributed to special 
IRAs would not be includible in income if held in the special 
IRA for at least 5 years. Contribution limits for IRAs, 
special IRAs, and elective deferrals under certain other 
tax-favored arranges would in coordinated. Individuals would 
be permitted to transfer amounts in IRAs to special IRAs. 
The bill would add exemptions to the 10-percent tax on early 
withdrawals for certain distributions for certain medical 
expenses, first-time home purchase, and education expenses. 

The bill would reduce defense spending in order to 
offset the cost of the bill's other proposals. 

S. 1846, "The Family Tax Relief Act of 1991" 
(Senator Bradley) 

The bill would provide a refundable tax credit equal to 
$350 for each dependent child under age 18, and would reduce 
certain spending and modify the budget process to offset the 
cost of this credit. 

S. 1009 
(Senators Coats, Burns, Gorton, Hatfield, and Mikulski) 

The bill would increase the personal exemption for 
dependent children under the age of 18 to $4,000 in 1992 and 
would modify the rounding rules for indexed amounts. 

S. 1411, "Middle Income Tax Relief and Family Preservation 
Act of 1991" (Senator Dodd) 

The bill would set the personal exemption to $2,300 in 
1992 and would provide an additional personal exemption for 
certain taxpayers based on the taxpayer's highest marginal 
tax rate. The bill would also provide an $800 refundable tax 
credit for children under age 5 that could be claimed in lieu 
of the personal exemption. The bill would increase 
individual tax rates, impose a surtax on certain high-income 
individuals, and increase the corporate tax rate. The bill 
would also repeal the restrictions on scholarships and 
fellowships added by the Tax Reform Act of 1986. 



-3- 



S. 955, "Working Family Tax Relief Act of 1991" 
(Senators Gore, Bingaman, Cranston, and DeConcini) 

The bill would replace the present-law personal 
exemption for children under 18 with a refundable tax credit. 
The bill would repeal the young child and supplemental health 
insurance competent of the earned income tax credit (EITC) 
and add an additional credit rate for families with three or 
more qualifying children. The bill would repeal present-law 
provisions that reduce personal exemptions and itemized 
deductions for higher-income individuals. The bill would 
increase individual income tax rates and impose a surtax on 
high-income individuals. 

S. 1013 (Senator Grassley) 

The bill would replace the present-law supplemental 
young child component of the earned income tax credit with an 
expanded supplemental young child credit available to 
taxpayers with qualifying children under the age of five. 

S. 1014 (Senator Grassley) 

The bill would increase the amount of the personal 
exemption in steps, culminating in an exemption amount of 
$7,000 for taxable years beginning after December 31, 1999. 
This personal exemption amount would be indexed for inflation 
occurring after 1999. 

S. 1875 (Senator Lieberman) 

The bill would set the regular personal exemption at 
$2,300 for 1992 and would allow a larger personal exemption 
in the case of children under the age of 10. Taxpayers who 
are eligible for the earned income tax credit would be able 
to claim a refundable tax credit in lieu of the personal 
exemption. 

S. 11, "The Social Security Tax Cut Act of 1991" 
(Senators Noynihan, Ezon, Hatch, Helms, Hollings, 
Inouye, Kasten, Pell, Sanford, and Symms) 

The bill would reduce the rate of the old age, 
survivors, and disability insurance portion of the payroll 
tax over a 5-year period and would increase the taxable wage 
base over the same period. The tax rate would increase again 
beginning after 2010. 

S. 1984, "Consumer Confidence and Financial Flexibility 
Act of 1991" (Senators Specter and Domenici) 

The bill would permit taxpayers with adjusted gross 
income below certain levels to make penalty-free withdrawals 
from individual retirement arrangements and certain pension 



-4- 



plans if the amounts withdrawn are used to purchase or 
improve real property or to purchase durable goods. The bill 
would also extend certain expiring provisions. 



-5- 



II. DESCRIPTION OP PROPOSALS 

A. S. 1921, "The Tax Fairness and Savings Incentive Act of 
1991" (Senators Bentsen, Adams, Akaka, Baucus, Boren, Breaux, 
Burdick, Daschle, DeConcini, Dodd, Ford, Hatch, Inouye, 
Johnston, Lieberman, Mikulski, Pryor, Roth, and Synnns) 

Present Lav 

Family tax credits 

Present law does not provide for tax credits based on 
the number of dependent children. However, taxpayers with 
dependent children are generally able to claim a personal 
exemption for these dependents. The total amount of personal 
exemptions is subtracted (along with certain other items) 
from adjusted gross income in arriving at taxable income. 
The amount of the personal exemption is $2,150 for 1991, and 
is adjusted for inflation. 

In addition, eligible low-income workers may claim a 
refundable earned income tax credit (EITC) of up to 15.7 
percent (17.3 percent for taxpayers with more than 1 
qualifying child) of the first $7,140 of earned income for 
1991. The maximum amount of credit for 1991 is $1,192 
($1,235 for taxpayers with more than 1 qualifying child), and 
this maximum is reduced by 11.93 percent (12.36 percent for 
taxpayers with more than 1 qualifying child) of earned income 
(or adjusted gross income, if greater) in excess of $11,250. 
The EITC is not available to workers with earned income (or 
adjusted gross income, if greater) over $21,245. Earned 
income consists of wages, salaries, other employee 
compensation, and net self -employment income. 

The credit rates for the EITC change over time under 
present law, as shown in the following table. 



Year 


One quali 
child 


fying 

[ 


Two or more 
qualifying ch; 


Lldren 




Credit 

rate 


Phaseout 
rate 


Credit 
rate 






Phaseout 
rate 


1992 


17.6 % 


12.57 % 


18.4 % 






13.14 % 


1993 


18.5 % 


13.21 % 


19.5 % 






13.93 % 


1994 
and after 


23.0 % 


16.43 % 


25.0 % 






17.86 % 



-6- 



The maximum amount of earned income on which the EITC may be 
claimed and the income threshold for the phaseout of the EITC 
are indexed for inflation. 

As part of the EITC, a supplemental young child credit 
is available for qualifying children under the age of one 
year. This "young child credit" rate is 5 percent and the 
phase-out rate is 3.57 percent. In addition, a supplemental 
health insurance credit under the EITC is available to 
taxpayers who provide health insurance coverage for their 
qualifying children. The health insurance credit rate is 6 
percent and the phase-out rate is 4.285 percent. Both 
supplemental credits are computed on the same base as the 
ordinary EITC. 

Individual retirement arrangements 

Under present law, under certain circumstances, an 
individual is allowed to deduct contributions (up to the 
lesser of $2,000 or 100 percent of the individual's 
compensation or earned income) to an individual retirement 
arrangement (IRA). The amounts held in an IRA, including 
earnings on contributions, generally are not included in 
gross income until withdrawn. Withdrawals prior to 
attainment of age 59-1/2 are generally subject to an 
additional 10-percent early withdrawal tax. 

The $2,000 deduction limit is phased out over certain 
adjusted gross income (AGI) thresholds if the individual or 
the individual's spouse is an active participant in an 
employer-sponsored retirement plan. An individual may make 
nondeductible IRA contributions (up to the $2,000 or 100 
percent of compensation limit) to the extent the individual 
is not permitted to make or does not make deductible IRA 
contributions. 

The IRA provisions were originally enacted in the 
Employee Retirement Income Security Act of 1974 (ERISA). 
Under ERISA, an individual was permitted to make deductible 
IRA contributions only if the individual was not an active 
participant in an employer-sponsored retirement plan. The 
limit on IRA deductions was the lesser of $1,500 or 15 
percent of compensation (or earned income, in the case of a 
self-employed individual). 

The Economic Recovery Tax Act of 1981 increased the IRA 
deduction limit to its current level and removed the 
restriction on IRA contributions by individuals who were 
active participants in employer-sponsored plans. The IRA 
rules in their current form were enacted as part of the Tax 
Reform Act of 1986. 



-7- 

Explanation of Provisions 

Tax credit 

The bill would allow taxpayers to claim a refundable tax 
credit equal to $300 for each qualifying child of the 
taxpayer. A "qualifying child" would be defined as a child 
under age 19 who resides with the taxpayer (this definition 
is used in the EITC eligibility rules). The $300 figure 
would be adjusted for inflation for taxable years after 1991. 

Individual retirement arrangements 

The bill would restore the deductibility of IRA 
contributions for all taxpayers under the rules in effect 
prior to the Tax Reform Act of 1986 and would index for 
inflation the limits on contributions to IRAs. In addition, 
the bill would create a new special IRA to which a taxpayer 
could make nondeductible contributions. Withdrawals from a 
special IRA would not be includible in income if attributable 
to contributions that had been held by the special IRA for at 
least 5 years. The limits on contributions to deductible 
IRAs and special IRAs and the limits on elective deferrals 
under certain other tax-favored arrangements (e.g., section 
401{k) plans) would be coordinated. 

The bill would permit amounts in IRAs to be transferred 
to a special IRA. Amounts so transferred generally would be 
includible in income as if the amounts had been withdrawn 
from the IRA, except that the early withdrawal tax would not 
apply. In the case of transfers made before January 1, 1994, 
the amount includible in income is spread over the 4 taxable 
years following the transfer. 

The bill would allow withdrawals from an IRA and from 
elective deferrals under (1) a qualified cash or deferred 
arrangement (sec. 401(k) plan), (2) a tax-sheltered annuity 
(sec. 403(b)), or (3) a section 501(c)(18) plan. The 
10-percent additional income tax on early withdrawals would 
not apply to such withdrawals to the extent the amount 
withdrawn is used for the purchase of a first home, for 
certain education expenses, or for catastrophic medical 
expenses (i.e., medical expenses in excess of 7.5 percent of 
AGI). The bill would also provide that the exception to the 
early withdrawal tax for distributions after age 59-1 '2 does 
not apply to deductible IRAs unless the contributions 
withdrawn have been in the IRA for at least 5 years before 
withdrawal. 



-8- 



Reduction in defense spending 

The bill would provide for a reduction in defense 
spending to offset the cost of the proposed tax credit. 

Effective Date 

The provisions of the bill would generally be effective 
for taxable years beginning after December 31, 1991, except 
that the new exceptions to the early withdrawal tax would 
apply to distributions after the date of enactment. 



B. S. 1846, 
Bradley) 



-9- 



'The Family Tax Relief Act of 1991" (Senator 



Present Law 



Present law does not provide for tax credits based on 
the number of dependent children. However, taxpayers with 
dependent children are generally able to claim a personal 
exemption for these dependents. The total amount of personal 
exemptions is subtracted (along with certain other items) 
from adjusted gross income in arriving at taxable income. 
The amount of the personal exemption is $2150 for 1991, and 
is adjusted for inflation. 



In additi 
refundable ear 
percent (17.3 
qualifying chi 
1991. The max 
($1,235 for ta 
this maximum i 
taxpayers with 
(or adjusted g 
The EITC is no 
adjusted gross 
income consist 
compensation. 



on, eligible 
ned income t 
percent for 
Id) of the f 
imum amount 
xpayers with 
s reduced by 

more than 1 
ross income, 
t available 

income, if 
s of wages, 
and net self 



low-income workers may claim a 
ax credit (EITC) of up to 16.7 
taxpayers with more than 1 
irst $7,140 of earned income for 
of credit for 1991 is $1,192 
more than 1 qualifying child), and 
11.93 percent (12.36 percent for 
qualifying child) of earned income 
if greater) in excess of $11,250. 
to workers with earned income (or 
greater) over $21,245. Earned 
salaries, other employee 
-employment income. 



The credit rates for the EITC change over time under 
present law, as shown in the following table. 



Year 


One qual 
child 


ifying 


Two or 1 
qualifying 


note 
chi 


Idren 




Credit 
rate 




Phaseout 
rate 


Credit 

rate 




Phaseout 
rate 


1992 


17.6 % 




12.57 % 


18.4 % 




13.14 % 


1993 


18.5 % 




13.21 % 


19.5 % 




13.93 % 


1994 
and after 


23.0 % 




16.43 % 


25.0 % 




17.86 % 



The maximum amount of earned income on wruch the EITC may be 
claimed and the income threshold for the phaseout of the EITC 
are indexed for inflation. 



-10- 



As part of the EITC, a supplemental young child credit 
is available for qualifying children under the age of one 
year. This "young child credit" rate is 5 percent and the 
phase-out rate is 3.57 percent. In addition, a supplemental 
health insurance credit under the EITC is available to 
taxpayers who provide health insurance coverage for their 
qualifying children. The health insurance credit rate is 6 
percent and the phase-out rate is 4.285 percent. Both 
supplemental credits are computed on the same base as the 
ordinary EITC. 

Elxplanation of Provisions 
Tax credit 

The bill would allow taxpayers to claim a refundable tax 
credit equal to $350 for each dependent child of the taxpayer 
under age 18. The $350 figure would be adjusted for 
inflation occurring after 1991. 

Revenue-raising provisions 

The bill would provide for reductions in a number of 
specified spending categories and for modifications in the 
Congressional budget process to offset the cost of the 
proposed tax credit. 

Effective Date 

The provisions of the bill would be effective for 
taxable years beginning after December 31, 1991. 



■11- 



C. S. 1009 (Senators Coats, Burns, Gorton, Hatfield, and 
Mikulski) 

Present Law 

Personal exemption 

Taxpayers are allowed a personal exemption for 
themselves (and spouse, in the case of a joint return) and 
for each dependent of the taxpayer. The exemption is 
structured as a deduction in determining taxable income. The 
level of the personal exemption was set at $2,000 for taxable 
years beginning in 1989 and has been indexed for inflation in 
subsequent years. For taxable years beginning in 1991, the 
personal exemption is $2,150. 

Rounding rules for indexed amounts 

In the case of the personal exemption, the standard 
deduction, the threshold for the limitation on itemized 
deductions, and the break points for the individual income 
tax brackets, if any indexed amount is not a multiple of $50, 
then it is rounded down to the next lowest multiple of $50. 

Explanation of Provisions 

Increase in personal exemption for certain dependent children 

The bill would increase the personal exemption to $4,000 
for dependent children under the age of 18 at the end of the 
taxable year. This amount would be indexed for inflation in 
subsequent years. 

Change in rounding rules for indexed amounts 

In the case of the personal exemption, the standard 
deduction, the threshold for the limitation on itemized 
deductions, and the break points for the individual income 
tax brackets, if any indexed amount is not a multiple of $10, 
then it would be rounded to the nearest multiple of $10. The 
bill is silent on what would happen if the indexed amount is 
a multiple of $5, but not of $10. 

Effective Date 

The bill would be effective for taxable years beginning 
after December 31, 1991. 



-12- 



D. S. 1411, "Middle Income Tax Relief and Family 
Preservation Act of 1991" (Senator Dodd) 



Present Law 
Personal exemption 

Taxpayers are allowed a personal exemption for 
themselves (and spouse, in the case of a joint return) and 
for each dependent of the taxpayer. The exemption is 
structured as a deduction in determining taxable income. The 
level of the personal exemption was set at $2,000 for taxable 
years beginning in 1989 and has been indexed for inflation in 
subsequent years. For taxable years beginning in 1991, the 
personal exemption is $2,150. 

Individual income tax rates 

For 1991, the individual tax rate schedules are — 

If taxable income is: Then income tax equals: 

Single individuals 

$0 - $20,350 15 percent of taxable income 

$20,350 - $49,300 $3,052.50 plus 28% of the 

amount over $20,350 
over $49,300 $11,158.50 plus 31% of the 

amount over $49,300 

Heads of households 

$0 - $27,300 15 percent of taxable income 

$27,300 - $70,450 $4,095 plus 28% of the 

amount over $27,300 
over $70,450 $16,177 plus 31% of the 

amount over $70,450 

Married individuals filing joint returns 

$0 - $34,000 15 percent of taxable income 

$34,000 - $82,150 $5,100 plus 28% of the 

amount over $34,000 
over $82,150 $18,582 plus 31% of the 

amount over $82,150 

Alternative minimum tax 

An individual taxpayer is subject to an alternative 
minimum tax (AMT) if the amount of that tax exceeds the 
taxpayer's regular tax liability. The AMT rate is 24 percent 



-13- 



and is applied to the taxpayer's alternative minimum taxable 
income (generally computed by adding preference items to the 
taxpayer's regular taxable income). 

Corporate income tax rates 

For 1991, the corporate tax rate schedule is — 



If taxable income is 

$0 - $50,000 
$50,000 - $75,000 

$75,000 - $100,000 

$100,000 - $335,000 

over $335,000 



Then income tax equals: 

15 percent of taxable income 
$7,500 plus 25% of the 

amount over $50,000 
$13,750 plus 34% of the 

amount over $75,000 
$22,250 plus 39% of the 

amount over $100,000 
34 percent of taxable income 



Treatment of scholarships and fellowships 

The Code permits an exclusion from gross income for 
qualified scholarship amounts received by individuals who are 
degree candidates at an educational institution that normally 
maintains a regular faculty, curriculum, and enrolled body of 
students (sec. 117). "Qualified scholarships" are limited to 
amounts received by an individual as a scholarship or 
fellowship grant that are used for tuition, fees, books, and 
supplies required for attendance at the educational 
institution. As a result of the Tax Reform Act of 1986, 
amounts received for room and board (or other personal 
expenses) are included in gross income. 

An exclusion from gross income is also provided for 
certain "qualified tuition reductions," meaning reductions in 
tuition provided to an employee of an educational institution 
for the education below the graduate level of the employee 
(or certain relatives or retired employees) at that 
institution or another educational institution. This 
exclusion from gross income is provided for a tuition 
reduction used for education above the graduate level if 
provided to a graduate student who is engaged in teaching or 
research activities. 

The exclusion from gross income for qualified 
scholarships or tuition reductions do not, however, apply to 
any amount received that represents compensation for 
teaching, research, or other services by the student required 
as a condition for receiving the scholarship or tuition 
reduction. 



-14- 



Explanation of Provisions 

Personal exemption increase for certain taxpayers 

The bill would set the regular personal exemption to 
$2,300 for taxable years beginning in 1992 and would allow an 
additional exemption for certain taxpayers. To determine 
eligibility for the additional exemption, the taxpayer would 
first calculate his or her taxable income using the regular 
personal exemption. If the taxable income so determined 
would be subject to a statutory marginal rate of 15 percent, 
then the taxpayer would be allowed an additional $1,150 per 
exemption. If the taxable income so determined would be 
subject to a statutory marginal rate of 28 percent, then the 
taxpayer would be allowed an additional $575 per exemption. 

All of the amounts above, including the regular personal 
exemption, would be indexed for inflation in years after 
1992. 

Credit in lieu of the personal exemption 

If the taxpayer has a dependent child under the age of 5 
at the end of the taxable year, then the taxpayer would be 
eligible for an $800 refundable tax credit in lieu of the 
personal exemption for that child. The amount of the 
refundable child credit would be indexed for inflation in 
years after 1992. These indexed amounts would be rounded up 
to the nearest $10. 

Under the bill, the refundable portion of the child 
credit would be payable in advance for certain taxpayers who 
elect such treatment. The Treasury Department would be 
directed to pay such taxpayers approximately 80 percent of 
the estimated refund in quarterly installments. 

Increase in individual tax rates 

A 34 percent bracket would apply to taxable incomes 
above: $160,000 (married individuals filing joint returns); 
$120,000 (unmarried individuals filing as head of household); 
$100,000 (unmarried individuals filing single returns); 
$80,000 (married individuals filing separate returns); and 
$12,600 (estates and trusts). These thresholds are expressed 
at 1990 levels and would be adjusted for inflation to 1992 
levels. 

The alternative minimum tax rate would be increased from 
24 percent to 27 percent. 



-15- 



Surtax on high-income individuals 

A surtax would apply to individuals (including estates 
and trusts) with taxable income over $300,000 ($150,000 for 
married taxpayers filing separate returns). In the case of 
the regular income tax, the surtax would equal: 

(10%)(1 - [$300,000/taxable income ])( regular tax liability). 

A surtax of 2.5 percent would apply to AMT income above 
$300,000 ($150,000 for married taxpayers filing separate 
returns ) . 

In addition, the surtaxes would apply to the 28 percent 
rate applicable to capital gains income. 

Increase in corporate i ncome tax rates 



The top marginal rate bracket for corporations (applying 
to taxable income in excess of $75,000) would be increased to 
Thus the corporate rate schedule would be 
the following — 



35 percent, 
changed to 



If taxable income is; 

$0 - $50,000 
$50,000 - $75,000 

$75,000 - $100,000 

$100,000 - $335,000 

over $335,000 



Then income tax equals: 

15 percent of taxable income 
$7,500 plus 25% of the 

amount over $50,000 
$13,750 plus 35% of the 

amount over $75,000 
$22,250 plus 40% of the 

amount over $100,000 
35 percent of taxable income 



Elxclusion from income for scholarships and fellowships 

The bill would repeal the amendments made to section 117 
by the Tax Reform Act of 1986 and would return to pre-1986 
law, so that: 

(1) an unlimited exclusion from gross income would be 
provided for amounts received by a degree candidate as a 
scholarship at an educational institution (described in sec. 
170(b) ( 1) (A) (ii) ) or fellowship grant, including the value of 
contributed services and accommodations (i.e., room and 
board) ; 

(2) an exclusion from gross income would be provided for 
amounts received incident to a scholarship or fellowship 
grant to cover expenses for travel, research, clerical help, 
or equipment; 



-16- 



(3) non-degree candidates could exclude certain 
scholarships or fellowships from gross income, subject 
limitation that the amount received not exceed $300 
multiplied by the number of months for which the r'^'^'^-^^ 
received amounts under the scholarship or fellowsh 



to a 



recipient 

ip; 



(4) if teaching, research, or other part-time employment 
services are required of all candidates for a particular 
degree (whether or not recipients of scholarship or 
fellowship grants) as a condition of receiving the degree, 
then the amount of scholarship or fellowship excludible from 
gross income would not be reduced by the amount that 
represents compensation for such services performed by the 
student; and 

(5) certain Federal grants would be excludible from 
income, even if the recipient is required to perform future 
services as a Federal employee or to serve as a health 
professional in designated areas. 

Effective Dates 

All provisions of the bill except those dealing with 
scholarships and fellowships would be effective for taxable 
years beginning after December 31, 1991. 

The provision dealing with scholarships and fellowships 
would be effective for all taxable years beginning after 
December 31, 1986. In addition, within one year after date 
of enactment, closed taxable years could be re-opened for 
taxpayers to claim a refund or credit of any overpayment of 
tax resulting from the provision relating to scholarships and 
fellowships. 



-17- 



E. S. 955, "Working Family Tax Relief Act of 1991" (Senators 
Gore, Bingaman, Cranston, and DeConcini) 

Present Law 

Personal exemption 

Taxpayers are allowed a personal exemption for 
themselves (and spouse, in the case of a joint return) and 
for each dependent of the taxpayer. The exemption is 
structured as a deduction in determining taxable income. The 
level of the personal exemption was set at $2,000 for taxable 
years beginning in 1989 and has been indexed for inflation in 
subsequent years. For taxable years beginning in 1991, the 
personal exemption is $2,150. 

Personal exemption phaseout 

Under present law, the deduction for the personal 
exemptions claimed by a taxpayer is phased out for taxpayers 
with adjusted gross income (AGI) above a threshold amount. 
For each $2,500 (or fraction thereof) of AGI above the 
threshold, the deduction for personal exemptions is reduced 
by 2 percent. For 1991, the threshold is $150,000 for 
married individuals filing joint returns, $125,000 for 
unmarried individuals filing as head of household, and 
$100,000 for unmarried individuals filing single returns. 
These threshold figures are to be adjusted for inflation for 
taxable years after 1991. This provision is effective for 
taxable years beginning after December 31, 1990, and before 
January 1, 1996. 

Itemized deduction phaseout 

Individuals are allowed deductions for certain personal 
expenses, such as State and local taxes, home mortgage 
interest, certain medical expenses and casualty losses, and 
charitable contributions. Under present law, the total of 
otherwise allowable deductions for these items that may be 
claimed by a taxpayer is reduced by an amount equal to 3 
percent of the taxpayer's AGI in excess of $100,000. In no 
event may the reduction in itemized deductions exceed 80 
percent of otherwise allowable deductions. The $100,000 
threshold is adjusted for inflation for taxable years after 
1991. This provision is effective for taxable years 
beginning after December 31, 1990, and before January 1, 
1996. 

Earned income tax credit 

Eligible low-income workers may claim a refundable 
earned income tax credit (EITC) of up to 16.7 percent (17.3 
percent for taxpayers with more than 1 qualifying child) of 
the first $7,140 of earned income for 1991. The maximum 



-18- 



amount of credit for 1991 is $1,192 ($1,235 for taxpayers 
with more than 1 qualifying child), and this maximum is 
reduced by 11.93 percent (12.36 percent for taxpayers with 
more than 1 qualifying child) of earned income (or adjusted 
gross income, if greater) in excess of $11,250. The EITC is 
not available to workers with earned income (or adjusted 
gross income, if greater) over $21,245. Earned income 
consists of wages, salaries, other employee compensation, and 
net self -employment income. 

The credit rates for the EITC change over time under 
present law, as shown in the following table. 



Year One qualifying Two or more 

child qualifying children 





Credit 


Phaseout 


Credit 


Phaseout 




rate 


rate 


rate 


rate 


1992 


17.6 % 


12.57 % 


18.4 % 


13.14 % 


1993 


18.5 % 


13.21 % 


19.5 % 


13.93 % 


1994 


23.0 % 


16.43 % 


25.0 % 


17.86 % 


and after 











The maximum amount of earned income on which the EITC may be 
claimed and the income threshold for the phaseout of the EITC 
are indexed for inflation. 

As part of the EITC, a supplemental young child credit 
is available for qualifying children under the age of one 
year. This "young child credit" rate is 5 percent and the 
phase-out rate is 3.57 percent. In addition, a supplemental 
health insurance credit under the EITC is available to 
taxpayers who provide health insurance coverage for their 
qualifying children. The health insurance credit rate is 6 
percent and the phase-out rate is 4.285 percent. Both 
supplemental credits are computed on tne same base as the 
ordinary EITC. 



-19- 



Individual income tax rates 

For 1991, the individual tax rate schedules are — 

If taxable income is: Then income tax equals: 

Single individuals 

$0 - $20,350 15 percent of taxable income 

$20,350 - $49,300 $3,052.50 plus 28% of the 

amount over $20,350 
over $49,300 $11,158.50 plus 31% of the 

amount over $49,300 

Heads of households 

$0 - $27,300 15 percent of taxable income 

$27,300 - $70,450 $4,095 plus 28% of the 

amount over $27,300 
over $70,450 $16,177 plus 31% of the 

amount over $70,450 

Married individuals filing joint returns 

$0 - $34,000 15 percent of taxable income 

$34,000 - $82,150 $5,100 plus 28% of the 

amount over $34,000 
over $82,150 $18,582 plus 31% of the 

amount over $82,150 

Alternative minimum tax 

An individual taxpayer is subject to an alternative 
minimum tax (AMT) if the amount of that tax exceeds the 
taxpayer's regular tax liability. The AMT rate is 24 percent 
and is applied to the taxpayer's alternative minimum taxable 
income (generally computed by adding preference items to the 
taxpayer's regular taxable income). 

Explanation of Provisions 

Tax credit for dependent children 

The bill would replace the current personal exemption 
for children under age 18 with a ref>^r.dable tax credit no 
larger than $800 per child. Each q'^al.fymg taxpayer would 
receive at least a credit of $400. The xaximum credit would 
be equal to 20 percent of earned income (and child support 
received), not to exceed $800 per cm Id. The $800 and $400 
amounts would be indexed for inflation beginning after 
December 31, 1993. 



-20- 



The refundable portion of the child credit would be 
payable in advance for certain taxpayers who elect such 
treatment. The Treasury Department would be directed to pay 
such taxpayers approximately 80 percent of the estimated 
refund in quarterly installments. 

Simplification and expansion of the EITC 

The supplemental young child component of the EITC and 
the supplemental health insurance component of the EITC would 
be repealed. An additional credit rate would be added for 
larger families (those with three or more qualifying 
children). For 1994 and later years, the EITC schedule would 
be: 

Credit rate Phaseout rate 

Families with: 

1 qualifying child 22 % 17 % 

2 qualifying children 27 % 17 % 

3 or more qualifying 32 % 17 % 

children 

For 1992 and 1993, the credit rates would be somewhat lower 
as they are phased in over a three-year period. 

Repeal of personal exemption phaseout and limitation on 
itemized deductions 

The present-law provisions under which personal 
exemptions and itemized deductions are either reduced or 
eliminated for higher income individuals would be repealed. 



-21- 

Revenue offsets ^ 

Increased individual income tax rates 

The present-law regular tax 31-percent rate would be 
increased to 32 percent, and a new 35-percent rate would 
apply to taxable incomes in excess of — 

Single individuals $ 78,400 

Heads of household 94,000 

Married individuals filing 
joint returns and certain 
surviving spouses 110,000 

Married individuals filing 

separate returns 55,000. 

The individual alternative minimum tax rate would be 
increased to 29 percent. 

Surtax 

An 11-percent surtax would apply to tax attributable to 
AGI in excess of — 

Single individuals $150,000 

Heads of household 200,000 

Married individuals filing 
joint returns and certain 
surviving spouses 250,000 

Married individuals filing 

separate returns 125,000. 



2 Following introduction, S. 955 was estimated to 
result in a revenue loss. In July 1991, Senator Gore 
announced his intention to modify the revenue offset portions 
of the bill as follows: 

a. The 35-percent maximum individual income tax rate 
would be increased to 36 percent. 

b. The 11-percent surtax rate would be increased to 15 
percent and the AGI thresholds would be reduced. For 
example, the new threshold for married individuals filing 
joint returns would be $200,000. 

c. The EITC provisions would be modified by eliminating 
any family size adjustment (larger credit rates for larger 
families), and using revenues raised from repeal of the 
supplemental young child and health insurance components of 
the EITC to increase the basic credit rate. Under the 
proposed change, the basic credit rate would be 20 percent 
for 1992, 22 percent for 1993, and 24 percent for 1994 and 
thereafter. 



-22- 
Effective Dates'^ 



The provisions of the bill would apply to taxable years 
beginning after December 31, 1991. 



^ In his July 1991 statement. Senator Gore proposed 
delaying the effective dates of the surtax and the $800 
refundable credit to taxable years beginning after December 
31, 1992. 



-23- 

F. S. 1013 (Senators Grassley and Coats) 

Present Law 

Earned income tax credit 

Eligible low-income workers may claim a refundable 
earned income tax credit (EITC) of up to 16.7 percent (17.3 
percent for taxpayers with more than 1 qualifying child) of 
the first $7,140 of earned income for 1991. The maximum 
amount of credit for 1991 is $1,192 ($1,235 for taxpayers 
with more than 1 qualifying child), and this maximum is 
reduced by 11.93 percent (12.36 percent for taxpayers with 
more than 1 qualifying child) of earned income (or adjusted 
gross income, if greater) in excess of $11,250. The EITC is 
not available to workers with earned income (or adjusted 
gross income, if greater) over $21,245. Earned income 
consists of wages, salaries, other employee compensation, and 
net self-employment income. 

The credit rates for the EITC change over time under 
present law, as shown in the following table. 



Year One qualifying Two or more 

child qualifying children 

Credit Phaseout Credit Phaseout 

rate rate rate rate 

1992 17.6 % 12.57 % 18.4 % 13.14 % 

1993 18.5 % 13.21 % 19.5 % 13.93 % 

1994 23.0 % 16.43 % 25.0 % 17.86 % 
and after 



The maximum amount of earned income on which the EITC may be 
claimed and the income threshold for the phaseout of the EITC 
are indexed for inflation. 

As part of the EITC, a supplemental young child credit 
is available for qualifying children under the age of one 
year. This "young child credit" rate is 5 percent and the 
phase-out rate is 3.57 percent. In addition, a supplemental 
health insurance credit under the EITC is available to 
taxpayers who provide health insurance coverage for their 
qualifying children. The health insurance credit rate is 6 
percent and the phase-out rate is 4.285 percent. Both 



-24- 



supplemental credits are computed on the same base as the 
ordinary EITC. 

Explanation of Provisions 

The bill would replace the present-law supplemental 
young child credit component of the EITC with an expanded 
supplemental young child credit available to taxpayers with 
qualifying children under the age of five. The maximum 
amount of the credit would be $500 for each qualifying child 
and the total amount of credit would be phased out ratably 
for taxpayers with adjusted gross income (AGI) between 
$50,000 and $60,000 (if greater, earned income would be 
substituted for AGI). Taxpayers claiming the expanded 
supplemental young child credit would not be permitted to 
claim the dependent care credit for expenses related to these 
children. 

Effective Date 

The provision is effective for taxable years beginning 
after December 31, 1991. 



-25- 

G. S. 1014 (Senator Grassley) 

Present Law 

Taxpayers are allowed a personal exemption for 
themselves (and spouse, in the case of a joint return) and 
for each dependent of the taxpayer. The exemption is 
structured as a deduction in determining taxable income. The 
level of the personal exemption was set at $2,000 for taxable 
years beginning in 1989 and has been indexed for inflation in 
subsequent years. For taxable years beginning in 1991, the 
personal exemption is $2,150. 

Explanation of Provision 

The bill would increase the amount of the personal 
exemption to $7,000 for taxable years beginning after 
December 31, 1999. The $7,000 figure would be subsequently 
indexed for inflation, similar to the indexing under current 
law. For taxable years beginning after December 31, 1991, 
and before January 1, 2000, the exemption amount would be 
determined by the following table: 

For taxable years beginning The exemption amount 
in calendar years: would be: 

1992 $2,700 

1993 3,200 

1994 3,750 

1995 4,300 

1996 4,850 

1997 5,400 

1998 5,950 

1999 6,500 

Effective Date 

The provision would be effective for taxable years 
beginning after December 31, 1991. 



-26- 

H. S. 1875 (Senator Lieberman) 

Present Law 

Personal exemption 

Taxpayers are allowed a personal exemption for 
themselves (and spouse, in the case of a joint return) and 
for each dependent of the taxpayer. The exemption is 
structured as a deduction in determining taxable income. The 
level of the personal exemption was set at $2,000 for taxable 
years beginning in 1989 and has been indexed for inflation in 
subsequent years. For taxable years beginning in 1991, the 
personal exemption is $2,150. 

Personal exemption phaseout 

Under present law, the deduction for the personal 
exemptions claimed by a taxpayer is phased out for taxpayers 
with adjusted gross income (AGI) above a threshold amount. 
For each $2,500 (or fraction thereof) of AGI above the 
threshold, the deduction for personal exemptions is reduced 
by 2 percent. For 1991, the threshold is $150,000 for 
married individuals filing joint returns, $125,000 for 
unmarried individuals filing as head of household, and 
$100,000 for unmarried individuals filing single returns. 
These threshold figures are to be adjusted for inflation for 
taxable years after 1991. This provision is effective for 
taxable years beginning after December 31, 1990, and before 
January 1, 1996. 

Earned income tax credit 

Eligible low-income workers may claim a refundable 
earned income tax credit (EITC) of up to 16.7 percent (17.3 
percent for taxpayers with more than 1 qualifying child) of 
the first $7,140 of earned income for 1991. The maximum 
amount of credit for 1991 is $1,192 ($1,235 for taxpayers 
with more than 1 qualifying child), and this maximum is 
reduced by 11.93 percent (12.36 percent for taxpayers with 
more than 1 qualifying child) of earned income (or adjusted 
gross income, if greater) in excess of $11,250. The EITC is 
not available to workers with earned income (or adjusted 
gross income, if greater) over $21,245. Earned income 
consists of wages, salaries, other employee compensation, and 
net self -employment income. 

The credit rates for the EITC change over time under 
present law, as shown in the following table. 



-27- 



Year 


One qual 
child 


ifying 




Credit 
rate 




Phaseout 
rate 


1992 


17.6 % 




12.57 % 


1993 


18.5 % 




13.21 % 


1994 
and after 


23.0 % 




16.43 % 



Two or more 
qualifying children 

Credit Phaseout 
rate rate 

18.4 % 13.14 % 

19.5 % 13.93 % 
25.0 % 17.86 % 



The maximum amount of earned income on which the EITC may be 
claimed and the income threshold for the phaseout of the EITC 
are indexed for inflation. 

As part of the EITC, a supplemental young child credit 
is available for qualifying children under the age of one 
year. This "young child credit" rate is 5 percent and the 
phase-out rate is 3.57 percent. In addition, a supplemental 
health insurance credit under the EITC is available to 
taxpayers who provide health insurance coverage for their 
qualifying children. The health insurance credit rate is 6 
percent and the phase-out rate is 4.285 percent. Both 
supplemental credits are computed on the same base as the 
ordinary EITC. 

Explanation of Provisions 

The bill would set the regular personal exemption to 
$2,300 for taxable years beginning in 1992 and would allow a 
larger personal exemption in the case of children under the 
age of 10 at the end of the taxable year. Taxpayers who are 
eligible for the EITC would be able to claim a refundable tax 
credit in lieu of the personal exemption- 
Personal exanption for young children 
In general 

The amount of the personal exemption for a dependent 
child under the age of 10 would depend upon both the 
taxpayer's tax bracket and the age of the child. To 
determine the size of the child's personal exemption, the 
taxpayer would first calculate his or her taxable income 
assuming the child received the regular personal exemption 



-28- 



($2,300 for 1992). If the taxable income so determined would 
be subject to a statutory marginal rate of 15 percent, then 
the following schedule of child personal exemptions would 
apply: 

Age of child Child's personal exemption 

Under 6 $7,000 

6 $6,500 

7 $6,000 

8 $5,500 

9 $5,000 

If the taxable income determined above would be subject to a 
statutory marginal rate of 28 percent, then the following 
schedule of child personal exemptions would apply: 

Age of child Child's personal exemption 

Under 6 $3,750 

6 $3,482 

7 $3,214 

8 $2,946 

9 $2,679 

If the taxable income so determined would be subject to a 
statutory marginal rate of 31 percent, then the following 
schedule of child personal exemptions would apply: 

Age of child Child's personal exemption 

Under 6 $3,387 

6 $3,145 

7 $2,903 

8 $2,661 

9 $2,419 

All of the amounts above, including the regular personal 
exemption, will be indexed for inflation in years after 1992. 

Denial of augmented deduct ion for high-income 
taxpayers 

If the taxpayer's adjusted gross income exceeds a 
threshold amount, then only the regular personal exemption 
could be claimed for each child. ( T^.e threshold amount is 
not defined in the statutory language of the bill, but may be 
intended to equal that for the persor.al exemption phaseout.) 

Denial of dependent care credi t 

If the taxpayer has an adjusted gross income below the 
threshold amount listed above and if tne taxpayer claims the 
augmented personal exemption for a child under the age of 10, 



-29- 



then that child would not be a qualifying individual in 
determining eligibility for the dependent care credit under 
Section 21 of the Code. 

Credit in lieu of the personal exemption 

If the taxpayer is eligible for the EITC, then he or she 
would also be eligible for a refundable tax credit in lieu of 
the personal exemption for each child under the age of 10. 
The amount of the credit would depend upon the age of the 
child as follows: 

Age of child Refundable child credit 

Under 6 $1,050 

6 $975 

7 $900 

8 $825 

9 $750 

The amounts of the refundable child credit listed above 
would be indexed for inflation in years after 1992. The 
indexed amounts would be rounded to the nearest $10 (rounded 
up if a multiple of $5, but not $10). 

The refundable portions of the EITC and child credit 
would be payable in advance for certain taxpayers who elect 
such treatment. The Treasury Department would be directed to 
pay such taxpayers approximately 80 percent of the estimated 
refund in quarterly installments. 

Effective Date 

The provisions of the bill would be effective for 
taxable years beginning after December 31, 1991. 



-30- 



I. S. 11, "The Social Security Tax Cut Act of 1991" 
(Senators Moynihan, Exon, Hatch, Helms, Hollings, Inouye, 
Kasten, Pell, Sanford, and Symms) 

Present Law 

Contributions made under the Federal Insurance 
Contributions Act (FICA) provide funds to pay monthly 
benefits to retired or disabled workers and their dependents 
and to survivors of covered workers. Contributions are based 
on wages and earnings up to an annual maximum taxable wage 
base ($53,400 in 1991 for the Old Age, Survivors and 
Disability Insurance (OASDI) component). Both employers and 
employees contribute 6.2 percent of the taxable wage and 
earnings base for the OASDI portion of the payroll tax. 
Self-employed individuals pay tax at the combined 
employer-employee rate, but are permitted to deduct one-half 
of the payment as a business expense in determining their 
income tax liability. 

Explanation of Provisions 

The bill would reduce the rate of the OASDI (social 
security) portion of the payroll tax from the present level 
of 6.2 percent to 5.2 percent over a five-year period (this 
rate applies to both the employee and the employer). In 
addition, the bill would increase the maximum payroll tax 
base from the present level of $53,400 (for 1991) to $82,200 
over the same five-year period. (The intent is to set the 
maximum payroll tax base for OASDI equal to approximately 90 
percent of the total wage and salary payments in the economy. 
The current level is approximately 85 percent.) Due to the 
requirement that the Social Security system be in a position 
to meet all anticipated obligations over a 75-year horizon, 
OASDI tax rates would substantially increase after 2010, in 
part to finance the lower OASDI tax rate in the immediate 
future under the bill. 

The following table summarizes the changing OASDI tax 
rates under the bill. After 1996, the maximum wage base 
would be adjusted for inflation, similar to the procedure 
under current law. 



-31- 



year Payroll Tax Rate Maximum Payroll Tax 

Base 

1/91 through 6/91 6.2% $53,400 

7/91 through 12/91 5.7% $53,400 

1992 5.7% $60,600 

1993 5.7% $64,200 

1994 5.5% $70,200 

1995 5.5% $73,800 

1996 5.2% $82,200 

1997 - 2009 5.2% Adjusted for inflation 

2010 - 2014 5.6% Adjusted for inflation 

2015 - 2019 6.2% Adjusted for inflation 

2020 - 2024 6.8% Adjusted for inflation 

2025 - 2029 7.5% Adjusted for inflation 

2030 - 2039 7.8% Adjusted for inflation 

2040 - 2049 7.9% Adjusted for inflation 

2050 and after 8.1% Adjusted for inflation 

Effective Date 

The provisions of the bill would be effective for wages 

and earnings paid after January 1, 1991. 



-32- 



j. S. 1984, "Consumer Confidence and Financial Flexibility 
Act of 1991", (Senators Specter and Domenici) 

Present Law 

Taxation of distributions from IRAs and pension plans 

Under present law, a distribution from an individual 
retirement arrangement (IRA) or a qualified retirement plan 
generally is taxed according to the rules relating to 
taxation of annuities. That is, the distribution is 
includible in gross income in the year it is paid, except to 
the extent the amount distributed represents the employee's 
investment in the contract (i.e., basis) (sees. 72 and 402). 
Early distributions from IRAs and qualified plans, including 
most distributions made other than on account of death before 
the holder or employee attains age 59-1/2, are subject to an 
additional 10-percent tax (sec. 72(t)). 

In-service distributions of amounts attributable to 
elective deferrals under a qualified cash-or-def erred 
arrangement (sec. 401(k)) generally can be made only on 
account of hardship. The purchase of a principal residence 
may qualify for a hardship distribution if the distribution 
is necessary to the purchase. 

Expiring provisions 

Allocation and apportionment of research expenses 

Pursuant to Treasury regulations promulgated in 1977, 
research and experimentation expenditures are generally 
allocated as follows: (1) expenses for research that is 
undertaken solely to meet legal requirements imposed by a 
government and that cannot reasonably be expected to generate 
income (beyond de minimis amounts) outside that government's 
jurisdiction are allocated solely to income from sources 
within that jurisdiction; and (2) remaining research expenses 
are generally apportioned to foreign source income based on 
either (a) gross sales, except that a taxpayer using this 
method may first apportion at least 30 percent of such 
expenses exclusively to the source where over 50 percent of 
the taxpayer's research is performed; or (b) gross income, 
except that expenses apportioned to U.S. and foreign source 
income using a gross income method cannot be less than 50 
percent of the respective portions that would be apportioned 
to each income grouping using a combination of the sales and 
place-of-performance methods. 

A statutory allocation rule applies to the taxpayer's 
first two taxable years beginning after August 1, 1989, and 
on or before August 1, 1991. In these two taxable years, the 
statutory allocation rule provided that 64 percent of 



-33- 



U.S. -incurred R&E expenses were allocated to U.S. source 
income, 64 percent of foreign-incurred RSrE expenses are 
allocated to foreign source income, and the remainder of R&E 
expenses are allocated and apportioned either on the basis of 
sales or gross income, but subject to the condition that if 
income-based apportionment is used, the amount apportioned to 
foreign source income can be no less than 30 percent of the 
amount that would have been apportioned to foreign source 
income had the sales method been used. After August 1, 1991, 
the R&E allocation regulation applies. 

Tax credit for low-income rental housing 

A tax credit is allowed in annual installments over ten 
years for qualifying newly constructed or substantially 
rehabilitated low-income rental housing. For nonsubsidized 
qualifying housing, the credit has a present value of 70 
percent of the cost of low-income housing units. For housing 
receiving other Federal subsidies (e.g., tax-exempt bond 
financing) and for the acquisition cost of existing housing 
(e.g., costs other than rehabilitation expenditures), the 
credit has a present value of 30 percent of eligible costs. 

For a building to be a qualified low-income building, 
the building's owner generally must receive a credit 
allocation from the appropriate State credit authority. An 
exception is provided for property that is substantially 
financed with the proceeds of tax-exempt bonds subject to the 
State's private-activity bond volume limitation. The annual 
credit ceiling for each State is $1.25 per resident per year. 

The low-income housing credit is scheduled to expire on 
December 31, 1991. 

Qualified mortgage bonds and mortgage credit 
certificates 

Qualified mortgage bonds . — Qualified mortgage bonds 
(QMBs) are bonds whose proceeds are used (net of costs of 
issuance and a reasonably required reserve fund) to finance 
the purchase, qualifying rehabilitation, or improvement of 
single-family, owner-occupied residences located within the 
jurisdiction of the issuer of the bonds. The QMBs must meet 
purchase price and income eligibility limitations and other 
restrictions. 

Mortgage credit certificates . — Qualified governmental 
units may elect to exchange qualified mortgage bond authority 
for authority to issue mortgage credit certificates (MCCs) 
(sec. 25). MCCs entitle home buyers to nonrefundable income 
tax credits for a specified percentage of interest paid on 
mortgage loans on their principal residences. Once issued, an 
MCC remains in effect as long as the residence being financed 
continues to be the certificate-recipient's principal 



-34- 



residence. MCCs are subject to the same targeting 
requirements as QMBs . 

Targeted jobs tax credit 

Tax credit . --The targeted jobs tax credit is available 
on an elective basis to employers who hire individuals from 
nine targeted groups. The targeted groups consist of 
individuals who are either recipients of payments under 
means-tested transfer programs or who are economically 
disadvantaged or disabled persons. 

The credit generally is equal to 40 percent of up to 
$6,000 of qualified first-year wages paid to a member of a 
targeted group. Thus, the maximum credit generally is $2,400 
per individual. With respect to economically disadvantaged 
summer youth employees, however, the credit is equal to 40 
percent of up to $3,000 of wages, for a maximum credit of 
$1,200. 

The credit expires for individuals who begin work for an 
employer after December 31, 1991. 

Authorization of appropriations . — Present law authorizes 
appropriations for administrative and publicity expenses 
relating to the credit through December 31, 1991. These 
monies are to be used by the Internal Revenue Service and the 
Department of Labor to inform employers of the credit 
program. 

Explanation of Provisions 

Penalty-free withdrawals from IRAs and pension plans 

The bill would permit taxpayers whose adjusted gross 
income (AGI) is below a specified level to receive limited 
distributions from an IRA, or from amounts attributable to 
elective deferrals under a qualified cash-or-def erred 
arrangement (sec. 401(k)), tax-sheltered annuity contract 
(sec. 403(b)), or plan described in section 501(c)(18), 
without application of the additional 10-percent tax on early 
withdrawals. In addition, any amount includible in gross 
income by reason of such withdrawal would be includible 
ratably over the 4 taxable years beginning with the taxable 
year in which the withdrawal occurs. Under the bill, an 
ordering rule would treat distributions as made first from 
amounts that are includible in gross income of the individual 
when distributed. 

To qualify for the special tax treatment provided under 
the bill, distributions would have to be used by the 
individual receiving the distributions to purchase or improve 
real property or to purchase durable goods. Each 
distribution would have to be spent for such purpose within 6 



-35- 



months, or, if earlier, by the date on which the individual 
files his or her income tax return for the year in which the 
distribution occurred. Distributions would be eligible for 
special treatment only to the extent they did not, in the 
aggregate, exceed $10,000. 

Taxpayers would be eligible for the special treatment 
provided under the bill only if their AGI for their first 
taxable year beginning in 1991 did not exceed certain limits. 
Those limits would be $100,000 in the case of married 
individuals filing a joint return; $50,000 in the case of a 
married individual filing a separate return; and $75,000 in 
the case of any other taxpayer. 

The special tax treatment provided under the bill would 
apply only to distributions made during the period beginning 
on the date of enactment of the bill and ending on December 
31, 1992. 

One-year extension of expiring provisions 

Allocation and apportionment of research expenses 

The expired statutory allocation rule would continue to 
apply to research expenses treated as paid or incurred during 
the taxpayer's first three taxable years beginning after 
August 1, 1989, and on or before August 1, 1992. 

Tax credit for low-income rental housing 

The low-income housing credit would be extended through 
December 31, 1992. 

Qualified mortgage bonds and mortgage credit 
certificates 

The authority of State and local governments to issue 
tax-exempt qualified mortgage bonds and mortgage credit 
certificates would be extended through December 31, 1992. 

Targeted jobs tax credit 

The targeted jobs tax credit would be extended for nine 
months, so that it would be available with respect to wages 
paid to employees who begin work for an employer before 
December 31, 1992. 

Effective Date 

The provisions of the bill relating to withdrawals from 
IRAs and qualified pension plans would be effective for 
withdrawals made after the date of enactment. 



-36- 



The extension of the tax credit for research and 
experimentation would apply to taxable years beginning after 
August 1, 1991. 

The extension of the tax credit for low-income rental 
housing would apply to calendar years after 1991. 

The extension of the provisions relating to qualified 
mortgage bonds and certificates would apply to bonds issued 
after, and elections for periods after, December 31, 1991. 

The extension of the targeted jobs tax credit would 
apply to individuals who begin work for an employer after 
December 31, 1991.